Wednesday, January 21, 2009

Wed. 01/21/09 - Emini Addict

I was too busy at work to put on any real $ trades, but I spent part of the day in Emini Addict's live trading room (it was free for today). Due to lack of time, I didn't really focus much on his "ambush" setups but I think the gist of it is drawing Fibonacci retracement levels from swing high/low and expecting a buy/sell response at certain fib levels (50%-61.8%). This is an over-simplification and just a guess (you can check his blog for details). One thing that did catch my attention though was his money management technique. He always uses a 6-tick (1.5 point) stop-loss. He exits half of his position at +2 ticks, and tightens the stop-loss to 4-ticks, or at times, to 2-ticks making it a risk-free trade minus commissions, and rides out the remaining position to target or stop. I tried it out on Sim trading 2-lots and was up +$300 on a few trades; and this was with relatively poor execution (a couple of trades were taken while I was on a conference call). Do you guys have any feedback on this trade management method? It requires at least 2 contracts, along with a very high hit rate in order to be successful (my win rate was around 80%). Regardless, I think Emini Addict was up pretty good on the day, and at $29.99/month, his chat room is a good educational resource for new traders.TICK/VIX (3-min)

Market Balance (5-min)

You can see from this balance chart how my Rule of Shorts below the mid-point and Longs above, would have kept me out of trouble today. The mid-point is the gray line on the chart.

5 comments:

I think E-mini addict must be a student of John Carter's tradethemarkets.com . The ambush set-up is theirs and the trade management methodology also theirs.

Personally, I don't really like that type of trade management at all. You need very high accuracy to make it work because the winners are so much smaller than the losers. Also, if you're decent at seeing the big picture in the market, then you're cutting yourself very short by taking 2 ticks on half the trade, and also u'll barely catch any big moves by moving the stop so tight very quickly as you'll get whipsawed out by noise most of the time.

To me, it's really a very non-aggressive strategy that seems to espouse the "Trade not to lose" mentality, instead of trading to win. Unless you're an ultra active scalper, it usually pays to let winners run instead of cutting them short so u rarely take losses. Win rate is highly overrated when it comes to day trading.... it usually comes down to how big your winners are compared to your losers. And you can make great money with a won rate less than 40% if your winners are much bigger than your losses cuz you ride them for decent targets when the big picture line up.

But as always, just my personal opinion, and every trader has their own style.

That sounds like the risk management that John Carter uses. I used a version of it too in the past. From what I saw it does have it's advantages, and disadvantages. In certain market conditions this method will really help. The trick (IMHO)is to look at your past 25 -50 trades and see if this method would have netted you more money. For me, in the long run I was better off going back to what I use now. But John Carter (who I think this guy has learned this trick from based on some things I read on his site) is a VERY talented trader, I've watched him live, he's good! John, trading the Dow, uses a 30 point initial stop, exits 1/3 position at +5 and moves the stop to -10, then exits 1/3 at +20 and raises his stop to entry, then he let's the rest run and trails the stop.

As far as the mgmt - I never liked carter's mgmt style. Sign up for TTM's free videos Awais and check them out... Carters a great trader but IMO his technique scales out TOO aggressively IMO.

Using Michael's example of a 30 pt inital with 3 contracts... lets see... 1 Loss is -90 points... 1 Win is MAYBE (assuming he gets his first two targets and a runner) 50 points? Its just whack in terms of risk/reward.

Now heres the other side of the argument that I do feel is valid - the EXPECTANCY of getting those targets is something very powerful. Its not just about R:R - its about the probability of getting your position to a target level. I know personally I revolve all of my trading around the expectations of price getting to levels and I rather get out at predictable levels than hold for runners because of this. So its a balancing act. On one hand carter has huge initial risk - but on the other hand he is betting that the odds of him getting to reduced risk are very high. It is a principle I employ in my own methods, however I do it in a fairly minimalistic way - certainly not on par with Carter.

The only way to tell is to backtest it thoroughly with your own style.

Matt, you're right on about the R:R and expectancy of hitting the stop/target. I made a post about this last year titled Stops and Risk which dealt with this very issue. I'm comfortable with my current 2-pt stop-losses and they have done a good job of keeping me out of trouble, so probably best to stick with that until market conditions change. Even a 2-point stop is pretty aggressive.

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Disclaimer

Trading of securities, options and futures may not be suitable for everyone and involves the risk of losing part or all of your money. Commentaries are educational in nature and are designed to contribute to your general understanding of financial markets and technical analysis. Use it how you want and at your own risk. I am not a registered investment adviser. This information is a general publication that reflects my opinion and is not a specific recommendation to any one individual. You must consult your own broker or investment adviser for investment advice. Controlling risk through the use of protective stops is essential.